How To Apply The Wisdom Of 'The Superinvestors Of Graham & Doddsville'

{ Euclidean Q1 2009 Letter }


Thoughts For Q1 2009

This year we reread an article by Warren Buffett called, “The Superinvestors Of Graham & Doddsville” that was based on a speech Mr. Buffett provided at the Columbia Business School in 1984. The article is noteworthy in that it provides the track records of nine disciples of Benjamin Graham, the father of value investing, all of whom delivered results that exceeded the market index over long-periods of time. 

What John and I took away from this article was that, although each of these nine investors had different qualities in their investment styles, they all adhered to three principles:

  1.  Value is created within businesses and not within markets.
  2.  Good investing is buying companies for something less than they are worth at the time of investment (and  not betting on the come with regard to future products or industry developments).
  3.  Risk is best managed by maximizing the margin between a business’ inherent worth and the price at which  you can buy a portion of that business.

When the principles of these investors are distilled down into very simple rules – such as buying companies with low price-to-earnings, low price-to-book ratios, or -- as presented in Greenblatt’s The Little Book That Beats The Market – good companies at good prices, it can be demonstrated that simple mechanical portfolios using these rules also consistently outperform the market over long periods of time.  In our simulations, these three approaches yielded annualized returns of 13.6%, 14.5%, and 16.3% respectively across the period of 1970-2008.  During this same period, the S&P’s total annualized return was 9.4%.  More detail on these simulations, and the assumptions used in them, is presented at the end of this letter. 

These findings provide good context for how to think about Euclidean.  Our mission has been to apply our skills at building a more nuanced and complete way of codifying how great long-term investors evaluate companies.  We are excited about the insights we have uncovered and are pleased that our results versus the market have been consistent with what we have been able to simulate in the past. 

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Please let us know if you have any thoughts or comments on this letter.  Also, if you would like a copy of ‘The Superinvestors of Graham & Doddsville’, we are happy send one to you.  Last, if you would like to not receive these letters in the future or would prefer to receive them electronically, please just drop a note to seckler@euclidean.com 

Best Regards,   

John & Mike